If you co-own a business, you likely have heard of a buy-sell agreement. It is surprising, however, how many business owners either do not have this important document in place or misunderstand its purpose. The following are some frequently asked questions about buy-sell agreements.
What does a buy-sell agreement address?
You might think that a buy-sell agreement governs the buying and selling of a company; however, the name of this agreement can be misleading. The agreement is between the current owners of a company and dictates the following:
- When an owner has the right to – or is required to – sell their business interest
- What that interest will be worth
- Who can purchase the owner’s interest
Buy-sell agreements work to control who owns a company. Typically owners may not sell their interest to anyone of their choice. Instead, they must allow the other existing owners to buy out their interest instead.
When does a buy-sell agreement come into play?
Often, a buy-sell agreement goes into effect when one owner experiences a life event that affects their business interests. Such events can include:
For example, Texas is a community property state and requires all community property to be divided between spouses in a divorce, which often includes business interests. The owners of a company likely do not want the former spouse of one owner to suddenly have control and a stake in the business. In this situation, a buy-sell agreement will require that the ex-spouse sells the interest held back to the other existing owners or to the company itself. This can preserve ownership of the company, while compensating the ex-spouse for the interest.
How does a buy-sell agreement value a business interest?
There are several different methods of valuation when it comes to selling business interests. There is always the risk that different owners will want to use different methods, which can result in quite different prices for a buyout. A buy-sell agreement prevents these disputes by having the owners agree to one particular valuation method specified in the contract. This decreases disagreements when an owner needs to sell an interest.
Do you need an attorney for a buy-sell agreement?
Any business contract can have a future impact on your rights and finances. For this reason, you always want to ensure that every term of a contract is carefully negotiated, drafted, and/or reviewed by a knowledgeable business contracts attorney. A buy-sell agreement is no different and failing to have a properly drafted agreement can put your rights and interests at risk in the future.
Contact a Houston Business Attorney for Counsel and Assistance
The Weisblatt Law Firm regularly assists new and established business owners with buy-sell agreements and other important contracts. Having these important documents in place can improve owner relationships and prevent disputes. If you would like to discuss any type of contract, please call the office at 713-352-0847 or contact us online for more information today.
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